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1 Conference on Development of Indonesian Government Bond Market Jakarta, Indonesia July 25 - 26, 2000 Lillian Leong Investment and Treasury Department.

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Presentation on theme: "1 Conference on Development of Indonesian Government Bond Market Jakarta, Indonesia July 25 - 26, 2000 Lillian Leong Investment and Treasury Department."— Presentation transcript:

1 1 Conference on Development of Indonesian Government Bond Market Jakarta, Indonesia July 25 - 26, 2000 Lillian Leong Investment and Treasury Department Bank Negara Malaysia MALAYSIA’S EXPERIENCE IN DEVELOPING THE GOVERNMENT BOND MARKET

2 2 Outline Brief Historical Perspective Overview of Malaysian Government Bond Market Key Issues Lack of Supply Absence of Deep and Liquid Secondary Market Measures Taken So Far Market Liquidity Market Infrastructure Measures Going Ahead Regulatory Framework Inter-Agency Co-ordination

3 3 Historical Perspective…….

4 4 Legislation on Issuance of Government Securities Issuance of MGS by the government is governed under the Loan (Local) Ordinance 1959 BNM acts as an agent to the Government under Section 30 (1) (s) of Central Bank Act, 1958 where, “The bank (BNM) may undertake the issue and management of loans publicly issued - (i) by the government; (ii) by the government of any state; (iii) by any public authority; or (iv) with any approval of the MOF, by any corporation ”

5 5 A Little Bit of History….. Malaysian Govt. Bond Market evolved at a slow pace from 1950s Pace picked up in 1970s in line with government’s plan for economic diversification Malaysian Govt. Bond issuance then was dictated by the need for development financing Early 1980s, Government Bond Market expanded due to the recession following downturn in global economy

6 6 From 1988-1997 gross MGS issued reduced from RM45.9 to RM39.7 billion due to the success of the government privatisation programme Strong economic performance in 1990-1997 led to a decline in Government Bonds issuance

7 7 Dilemma With a fiscal surplus position, there was a dilemma between 2 objectives : i) The need to issue MGS for bench- marking purposes to develop the domestic bond market ; and ii) The associated issuance cost despite a fiscal surplus position

8 8 Market Overview

9 9 Composition of Ringgit Bond Market 19991987

10 10 Holders of Malaysian Government Securities 19991987

11 11 Total Domestic Debt as % of GDP

12 12 Issues

13 13 Absence of Deep and Liquid Secondary Market 1.“Captive” Market Created a “Holding” Bias Legal and Mandatory Requirements for most institutions EPF - 50% of its investible fund Insurance Companies - 20% in low risk assets including MGS Banking Institutions - 15 % of their EL to be invested in liquid asset including MGS

14 14 Absence of Deep and Liquid Secondary Market 2. Lack of Market Makers due to : Holding cost and lack of MGS issuance The fear of being caught in a “short” situation No mechanism to cover short position such as securities borrowing and lending programme

15 15 Measures Undertaken 1. Market Liquidity (a) MGS Issuance Process Basis of pricing MGS primary issue : From coupon fixing to market-determined auction system A system of principal dealers (PD) was introduced to promote a more active secondary market

16 16 Measures Undertaken (b) Interest Rate Liberalisation 1991 - Banking Institutions were allowed to determine their Based Lending Rate Less distortion on interest rate structure and yields curves - facilitate more active secondary trading of MGS

17 17 Measures Undertaken (c) New Liquidity Framework (NLF) Reduces the captive holding of MGS and the Liquid Asset Ratio premium

18 18 Measures Undertaken (d) Code of Conduct for Principals and Brokers in the wholesale Money and Forex Markets To maintain high level of professionalism To protect the credibility of oral contract

19 19 Measures Undertaken (e) Announcement of MGS Auction Calendar To enhance market transparency

20 20 Measures Undertaken (f) Re-opening of MGS To improve liquidity of the issue size

21 21 Measures Undertaken 2. Market Infrastructure (a) Clearing and Settlement System Implementation of RTGS settlement system known as RENTAS RENTAS is a real time electronic settlement and Delivery versus Payment system to further enhance efficiency and mitigate settlement risk

22 22 Measures Undertaken (b) Automated Tendering System Fully Automated System for Tendering (FAST) was introduced to replaced the manual process of tendering for MGS

23 23 Measures Undertaken (c) Bond Information Dissemination System Bond Information Dissemination System (BIDS) was introduced to provide market information on domestic bond market

24 24 Measures Going Ahead 3. Regulatory Framework (a) Establishment of National Bond Market Committee 1999 - The formation was to focus on policy direction, to rationalise regulatory framework and to recommend appropriate implementation strategies Three sub-committees were formed; – Product Institutional and Development Committee (PIDC) – Infrastructure and Operations Working Group (IOWG) –Legal and Regulatory Reforms Committee (LRCC)

25 25 Measures Going Ahead (b) Centralisation of regulatory function for fund raising activities July 2000 - Securities Commission (SC) made sole regulator for the securities market

26 26 Principal Dealers System was introduced with main role to make market Implementation of SPEEDS, a fully automated cash and securities settlement transactions Code of Conduct and Market Practices for trading in Malaysian Securities Market was introduced The setting up of first rating agency - RAM The setting up of second rating agency - Malaysian Rating Corporation Bhd (MARC) Chronological Development of Bond Market 1989 1990 1995

27 27 Chronological Development 1996 1997 1999 Incorporation of Malaysian Institute of Bond Dealers to represent the interest participants in bond market Implementation of FAST, a fully automated system of tendering for securities at the primary issue Issuance of Khazanah Benchmark Bond to create a benchmark yield curve for the Ringgit Bond market The setting up of the BIDS to promote awareness of the bond market to support primary and secondary trading The formation of NBMC, to provide policy directionand to rationalise the regulatory framework for the development of bond market The Capital Market Master Plan was initiated to chart the strategic positioning and future direction in the next ten years

28 28 Chronological Development 1999 2000 Code of Conduct and Market Practices for RENTAS was introduced to facilitate the conversion from SPEEDS to RENTAS (RTGS Settlement system) The Government Securities Auction Calendar was announced to enhance market transparency Re-opening MGS of the less liquid issue to build up the size in order to enhance market liquidity Securities Commission become the sole regulator for the bond market in Malaysia

29 29 End of Presentation Thank You

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